San Francisco is known for its mind-boggling booms and breathtaking busts as the hot money from all over the world ebbs and flows amidst startup frenzies and IPO manias.

And now the hot money is flowing. It has created a delirious craziness in the housing market, surrounded by an environment where app makers without revenues but with big dreams and the word “disrupt” in their description are worth billions and draw so much cash from investors that they struggle harder to burn through it all than to disrupt anything.

So I read with fatalist amusement in SF Curbed that the most expensive home on the market in early November is still on the market. At the time, SF Curbed described it this way:

Raw food chef Roxanne Klein and her entrepreneur/guitar-CEO husband, Michael Klein, have put their neoclassical-revival mega-manse on the market for $39 million. The couple have only owned the seven-bedroom, 16,000-square-foot home, located at 2701 Broadway, for two and a half years, having picked it up from real-estate mogul Ron Zeff for $27 million back in 2012…. The ask is a full $12 million above the last sale price, though the present owners haven’t so much as changed the paint in the au pair suite.

Why fatalist amusement? The asking price is 44% higher than when the home was sold two-and-a-half years ago.

So Fed Chair Yellen, in her press conference after the FOMC meeting today, said she’s surprised that housing hasn’t recovered more than it has. But for those who were on the receiving end of the Fed’s free money, the housing market recovered just fine.

There’s only one problem: there aren’t enough of these folks, and they don’t like to live in median homes. But with each price increase, more people who want to buy a median home to live in are left behind. And homes sales tumble.

In the nine-county San Francisco Bay Area, sales in November of new and resale houses and condos dropped 10% from November last year, according to CoreLogic DataQuick. It was the worst November since crisis-year 2008. DataQuick blames the debacle on the “limited number of homes for sale, cautious buyers, a challenging mortgage market, and a quirk of the calendar….”

But with a median price of $601,000 in November, up 9.3% year-over-year, there aren’t that many people left who can afford to buy a home. And investors, fattened by Yellen’s monetary policy? They’re starting to lose interest at these prices. These “absentee buyers” purchased 18.6% of the homes, down from 20.4% in November last year, the lowest level since September 2010.

Sales volume was down in all nine counties year-over-year, topped by my crazy and beloved San Francisco where sales plunged 20%.

But … the median price in San Francisco soared, gulp, 27% from November a year ago – um, that’s not a typo – reaching a new all-time record of $1,072,500.

That will buy a 2-bedroom no-view apartment in a so-so area.

The peak of the prior housing bubble in San Francisco occurred in November 2007, based on the same DataQuick series, with a median price of $814,750. After it imploded so spectacularly, everyone acknowledged that it had been an out-of-whack bubble phenomenon. Everyone had anecdotes of craziness. Sanity would henceforth reign in San Francisco, they said. Now, exactly seven years later, the San Francisco median home costs 32% more than it did during that crazy bubble peak.

Only this time, it’s neither a bubble nor a peak. It’s just an insufficiently recovering housing market, according to Yellen. And so she’s surprised that, after six years of free money for certain folks, it hasn’t “recovered” even more.

In the six-county Southland, the nuances are different. November home sales dropped 19% from October and 9.5% from November a year ago, to the lowest level for any November in seven years. The sales debacle hit lower priced homes particularly hard. While sales of homes over $500,000 edged down 3.3% year over year, sales of homes under $500,000 dropped 17%. And sales of homes below $200,000 plummeted 35%.

“Fewer investor purchases and other market factors,” is how DataQuick explained the phenomenon.

The median sale price of $412,000 hasn’t budged much since August and was up only 7% from a year ago – “only” because it was the sixth month in a row of single-digit year-over-year increases, after 22 months of double-digit gains. Hence the sense of stagnation in a world where prices must always soar.

The problem is that “traditional buyers haven’t filled the void left by the investors who’ve pulled out.” At $410,000 for a median home, “affordability and mortgage availability remain as hurdles, as do concerns about job security and the direction of the housing market.” The bad breath of reality.

In the miracle city of San Francisco, the plunging sales volume and skyrocketing prices coincide with an enormous building boom. Midrise buildings are sprouting like mushrooms, and a few towers are popping up too. Some of these units have started to come on the market, with many more scheduled for 2015 and 2016. But housing bubbles that culminate in building booms implode with particular splendor and a lot of nefarious side effects.

It appears that China’s “stimuli” for the US housing is over and that can be another contributing factor for the plunging sales. Lots of people from China were grabbing properties in California with cash. They managed to help set California, Vancouver, and other property markets on fire. Then recently the government of China began cracking down on “corruption”. I guess they were wondering what the heck happened to billions and billions of dollars that were supposed to have been invested back home. Well, they kinda knew but looked the other way and now short-term borrowing on the Shanghai market, soared to 12.20% from 6.80% on Monday. We’re in early days of an upcoming credit crunch. Overinvestment/overproduction –> deflation –> credit crunch –> crisis.

Julian the Apostate

Dec 19, 2014 at 7:06 am

What fascinates me is why ANYONE would want to buy property in that looter’s paradise. How could you plan anything long term when Sacramento might jerk the rug out from under you?